If you're looking for reliable investment income, there's certainly no shortage of attractive dividend stocks right now. Higher interest rates have driven dividend yields upward with them. A handful of bank stocks boast particularly strong (relative) dividend yields right now too, like Citigroup's (C -0.64%) 4.1% -- the highest among all the major banking names at this time.
But a superior yield in and of itself doesn't necessarily make a stock worth owning. There may be more to the story, or there may be more to your story that makes Citi a less appropriate dividend-paying pick for your portfolio.
Citigroup in focus, for better or worse
You know the company. Citigroup is the country's third-largest bank -- as measured by assets under management -- with 230,000 employees working in 95 countries. It operates well over 600 retail banking branches, yet its biggest profit centers are institutional services like commercial banking and capital markets.
More important to would-be investors, though, Citigroup's got a respectable (even if not riveting) dividend payment history.
Like many other banks at the time, 2008's subprime mortgage meltdown prodded this one to forego paying its dividend for a couple of years. But once it resumed these quarterly payments in 2011, it hasn't stopped paying them out.
There are downsides to owning Citi primarily for its dividend, however. Chief among them is its lack of dividend growth since the latter half of 2019. While the circumstances stemming from the COVID-19 pandemic rightfully forced Citigroup and its peers to think defensively, Citi has remained in defensive mode while its peers and rivals haven't; the quarterly dividend still stands at $0.51 per share.
Perhaps just as troubling is the bank's payout ratio, or the amount of its profit that's dished out in the form of dividends. It's just over 33%. This proportion theoretically leaves the other 66% of its earnings available to fund some dividend growth, but the current payout ratio is already higher than Citi's historical figure.
Data source: Thomson Reuters. Chart by author.
It's also telling that Citigroup's payout ratio is already bit above most of its chief competitors' dividend payout ratios. That's a hint there may be a bigger downside to simply passing along more of your profits to shareholders as they're earned (like not having access to enough capital when a bank needs it the most).
Good, but not great by comparison
But there's reasonable hope for dividend growth from here.
Thanks to higher interest rates, bank loans are more profitable than they've been in a long while. Citi is no exception to this trend. Last quarter's net interest income of $13.3 billion is a 23% improvement on the difference between its net interest costs and its net interest revenue for the comparable quarter from a year earlier. And since rates are likely to at least hold near their current levels for the foreseeable future, this profit windfall should persist.
It's a tailwind, however, that works in equal favor of all bank stocks. Other banks may up their payouts just as much as Citigroup might, if not more.
In the meantime, while Citi is technically the industry's cheapest bank stock as measured by its price-to-book ratio and one of its lowest-cost tickers on the basis of its price-to-earnings ratio, this is a case where investors might be wise to at least acknowledge the "it's cheap for a reason" argument. And much of that reason is rooted in Citi's loose spending habits biting into earnings.
While Oppenheimer analyst Chris Kotowski maintains an outperform rating on Citi shares, he acknowledges the company is spending relatively more than its peers, joining a small chorus of other analysts worried about Citi's fairly unchecked outlays. This may be why Citi is the analyst community's least favorite major banking name, sporting an average analyst call of right between hold and buy -- an arguable outright failure given analysts' usual bullish bias.
Citi's just not quite your best bet right now
If you already own Citi shares or intend to step into some in the near future, you're far from doomed. Barring an outright unpredictable calamity, the dividend will continue to be paid. It will probably even be increased at some point in the near future. You could certainly find lesser dividend stocks.
On balance, though, Citi's slightly higher dividend yield doesn't quite justify the relatively greater risk analysts as well as investors collectively see and sense here when similar options are readily available. That may change at some point in the future. Until it does, however, you're better off considering one of several other dividend-paying banking stocks to generate reliable, growing income from the financial sector.
